The Strategy for Selecting Top Co-Investments as a Limited Partner with Josh Porter

This episode focuses on strategies for limited partners in selecting top co-investments, featuring insights from Josh Porter, co-founder of Firstlook Partners.

1. Smaller funds often present significant investment opportunities, especially those under $50 million.
2. The LA venture ecosystem has matured significantly, with a diverse range of successful startups across various sectors.
3. Building strong, authentic partnerships is crucial in venture capital, similar to a long-term commitment in a marriage.
4. Co-investment strategies should be proactive and well-aligned with the overarching goals of the fund of funds.
5. Emerging managers play a critical role in the venture ecosystem, offering fresh perspectives and innovative strategies.

1: Introduction to Josh Porter and Firstlook Partners

Josh Porter discusses his journey and the focus of Firstlook Partners on smaller, emerging funds. The chapter provides an overview of the advantages of investing in these funds. Josh Porter: "Smaller funds make the best investment opportunities because they are nimble and often overlooked by large institutional investors."

2: Evolution of the LA Venture Ecosystem

Porter describes the growth and diversification of the LA venture capital scene, highlighting its development from entertainment-centric to a broad tech hub. Josh Porter: "LA's venture ecosystem has evolved dramatically, now hosting major players across tech and entertainment."

3: Strategic Partnerships and Investment Philosophy

The importance of selecting the right partners and the philosophy behind investment decisions at Firstlook Partners are discussed. Josh Porter: "Partnerships in venture capital are like marriages; they require mutual respect and aligned goals."

4: Co-Investment Strategies and Manager Selection

Details on how Firstlook Partners selects managers and structures co-investments to maximize returns. Josh Porter: "We look for managers who can not only identify but also effectively engage with high-potential startups."

5: Closing Remarks and Future Outlook

Porter and the hosts discuss the future of venture capital and the ongoing potential of emerging markets and managers. Josh Porter: "The venture capital landscape is constantly evolving, and staying ahead requires adaptability and keen insight."

1. Focus on emerging managers with smaller funds for potential high returns.
2. Evaluate the long-term potential of venture ecosystems, like LA, for diversified investment opportunities.
3. Ensure alignment in partnership values and goals to foster effective collaboration.
4. Adopt proactive co-investment strategies that anticipate market movements and manager needs.
5. Maintain flexibility and readiness to adapt strategies in response to market changes.

Founded in 2023, FirstLook Partners is a hybrid fund of funds investing in venture capital firms under $50M and software companies. FirstLook is managed by Josh Porter in Los Angeles, CA and Ankeet Kansupada in Chicago, IL. Visit their website at firstlookpartners.com.

Sydecar.io is a frictionless deal execution platform for venture investors. Our platform handles back-office operations for venture investors, automating banking, compliance, contracts, and reporting so that customers can focus on making deals and building relationships. Learn more at www.sydecar.io.

Swimming with Allocators is a podcast that dives into the intriguing world of Venture Capital from an LP (Limited Partner) perspective. Hosts Alexa Binns and Earnest Sweat are seasoned professionals who have donned various hats in the VC ecosystem. Each episode, we explore where the future opportunities lie in the VC landscape with insights from top LPs on their investment strategies and industry experts shedding light on emerging trends and technologies.

The information provided on this podcast does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this podcast are for general informational purposes only.

People

Josh Porter, Alexa Benz, Ernest Sweat

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Firstlook Partners

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Josh Porter

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Alexa Benz
Welcome to Swimming with Alligators, the VC. Podcast from the LP perspective, with your. Hosts Alexa Benz and Ernest Swett. You ready? Let's dive in.

Ernest Sweat
Today we are speaking with Josh Porter, co founder and GP of Firstlook Partners. Firstlook Partners is a hybrid fund of funds actively investing in funds under 50 million. Josh has done the Goldman thing, the VC thing, the family office thing, the operator thing. Am I missing anything today? Josh is going to explain why he thinks smaller funds make the best investment opportunities, among other gems.

Thanks for being here, Josh. Appreciate it. Thank you guys for having me. You are based in LA, and as somebody who's meeting with lots of emerging managers, we're curious what the LA venture ecosystem is like right now. Yeah, I mean, LA is awesome.

Josh Porter
Um, you know, it's a, it's an exciting, it's exciting right now. Um, obviously, like everybody in the business, it's been, uh, a challenging, you know, couple of years, uh, the last couple of years. But, you know, if we, if you zoom out, um, you kind of see how far the LA ecosystem has come since I got here. I moved to LA from New York in 2011, so I've been here almost, I guess, going on 13 years, and a lot of the funds that are now household names in our business anyway, didn't exist. So folks like Mucker and FicA and Bonfire and M 13 and wonder and three l, none of these funds were around.

So it's been really fun to watch and to kind of be a part of that over the last decade plus. And what I think is cool too. Is so for the LA market as well, what have you seen as far as for even the entrepreneurs? I think that they've really established themselves in a few markets. Yeah.

So I think what's also just been really, really cool to watch is when I got here, I think it was LA was sort of, we definitely had kind of a redheaded step stepchild syndrome compared to the folks up north. And I think part of that was because most of the founders here were building in kind of entertainment media direct to consumer e commerce brands. And that's because the fabric of LA has always kind of been the entertainment business. But as the ecosystem started to take off and more capital came here and founders could kind of raise money from outside of Silicon Valley, LA became a pretty nice place to live and to start a business. And so if you think back to kind of version one of the La tech venture backed ecosystem, you think of companies like Snap and Dollar, shave club and ring and gaming companies like Riot and Scope, Ly which, you know, all these businesses are massive, huge companies and massive success stories.

But now you've got companies like relativity Space and Anduril and Shield AI down in San Diego, and edtech, companies like GoGuardian. And there's billion plus dollar companies that have been built over the last decade in categories from everything from enterprise software to aerospace and defense to hard tech to, to Ed tech. So I think it speaks to kind of the maturation of the ecosystem. And it's just been, you see what's going on in El Segundo right now, and it's just been cool to watch. What stories or anecdotes do you feel that have really defined your perspective on the ecosystem from your days in the family office and vc stories that have defined it?

Well, so this comes to mind because we were, I was just talking about this the other day, and it's a funny story, and this is kind of like, this is like an only in LA story, but this was probably 2016 or 17. I was investing for a family office and got introduced to a guy named Ted Chung who had just launched a fund called Casa Verde. And so Casaverde was one of the first cannabis focused venture funds. And at the time, back in 20, 1617, that was kind of an edgy thing, but there was a huge opportunity in the space. And so I went and met Ted at their office.

At the Casaverde office. I think it was in either Westchester or Elsa Gundo. You know, I show up and we sit in a conference room, and Ted and I have this great, you know, 45 minutes conversation. Super smart guy, you know, kind of outlining the opportunity in the, in the category, and all of a sudden, the door opens and his, his assistant pops her head in and says, ted, snoop's here to see Josh. And I'm like.

And I'm like, trying to hold it together. I'm like. And, like, sure enough, in walks, in walks Snoop Dogg. And like, I'm, you know, I'm a hip hop fan. And since, like, early days, like, my think.

I think doggy style was one of the first CDs, not to date myself, but CDs I ever bought. And. And so, you know, all of a sudden, like, the legend walks in and sits down and Snoop starts, you know, pitching me the fund and the opportunity that they see and how he can leverage his personal brand to help companies. And it was an awesome meeting, and I just walked out of there thinking, like, there's no way that this stuff happens anywhere but LA. It was pretty awesome.

Alexa Benz
That's an insane story. And a very LA story. How do you think La can kind of, last question on the market, how do you think La can leverage, continue to leverage? How? It's like a melting pot of both entertainment and then we're seeing deep tech and all these other things.

Commerce be down there. Yeah, I think there's, so first of all, there's a whole handful of funds that have been created to kind of specifically do that. Folks like plus capital and M 13 does this pretty well. And so there's funds out there that are actually created to kind of leverage the entertainment business and the personal brand of celebrities. And look, it's like, I think when it works, it works really well.

Josh Porter
It doesn't work in every category. And it's got to be kind of, it's got to be authentic to sort of, you can't just sort of slap a celebrity on a DTC brand and expect it to blow up. But, you know, when it works, it works really well. And I think as kind of, you know, there's this conversion convergence of kind of media and content and commerce. And so I think that'll kind of continue to be an important theme in LA.

Alexa Benz
How do you and Anki become partners? Yeah. So Ankit and I met six or seven years ago now. We were both investors for a family office, and we, so that's kind of how we initially met. We were colleagues.

Josh Porter
And then in 2019, the family had invested in one of their portfolio companies, was kind of, it needed some help. It was going sideways. And so the principal at the family office asked Ankit and I to kind of step in and fix it. And so basically, so Ankit had moved from New York City with his wife and at the time, two year old daughter. And I was living in LA, and I was literally commuting to Chicago back and forth every Monday through Friday.

And the two of us sat next to each other for about a year and, you know, trying to fix, like, a very challenging situation. And, you know, when you're, when you're kind of thrown in the fire and in a stressful situation with, you kind of really get to know your colleagues. And so, you know, we, there was a lot of late nights at the office. You know, we have dinner, we go out after, afterwards for drinks and kind of developed a bond and a friendship and a mutual respect for each other and said, you know, one day we wanted to do this, you know, on our own. And here we are, you know, took us five years, but we did it.

Alexa Benz
Josh, on that point, I think that something that could be really helpful is, you know, people always talk about timing, and also, this is a relationships business. Yeah. Any advice for, you know, fund managers or, you know, even folks who are running fund to funds, what to look for to find those partners? Oof, that's a good question. I think so.

Josh Porter
I've. I'll say this. I think, first of all, you've got to, if you're going to partner with someone, obviously, it's a, it's like a marriage, and it's a very, very long term commitment. You know, you're gonna fight with each other, you know, almost daily. Right.

So there's gotta be. I mean, it's just true. And, like, by the way, that's healthy. And if you're not doing that, you're probably doing it wrong, but so it's gotta be someone. One that is kind of.

I think you have to have at least similar financial motivations about what you expect out of it. I think you have to have similar expectations about where you want it to go in five and ten years, and then you've got to have. There's got to be a mutual respect for one another because you're going to, there's inevitably going to be tough times, and there's going to just be times where you disagree with each other and you've got to do it. And those arguments can get heated, intense. You got to realize at the end of the day, like, we're all just trying to come to a higher truth and come to the right answer, and, you know, and so, yeah, you got to make sure.

It's got to be someone that you. That I think you know and have known for a bit and respect. I think that, like, people that try to partner up because, like, you know, this, the story looks good together or whatever, I think that's a huge. A huge mess. So we need to fight more.

Alexa Benz
Alexa, you guys. Yeah, you don't fight. You guys don't fight. Come on. I think we have a healthy.

Ernest Sweat
I think we have a healthy sparring. We're two Capricorns. So we come in thinking we're right. So that's already. Yeah.

Josh Porter
Who ends up being right? It's balanced. Totally. I like this thought of, if you have agreed on the end goal, you're gonna be able to figure out the tactics to get there. It's like eye on the prize.

Ernest Sweat
What's the blue ocean like, what is the big goal of your new fund of funds? Why does the world need another fund of funds? Great question. So I would say when we set out to do this, we saw kind of a gap in the market. And so what we're trying to do at first look is to be an institutional grade partner to smaller emerging managers.

Josh Porter
And the way we define that is $50 million fund sizes and below and managers on fund one, two or three or four. And so the issue that we saw, right. Is, so we talk to institutional lP's frequently, right. We talk to pensions, endowments, and, you know, fund of funds, right. And so a lot of these massive, these are massive pools of capital, right.

These are 2030, $50 billion pools of capital. And usually the teams are pretty thin, right. And so all of them that we talked to see the opportunity in the space and in the category that we're investing in, they know, like, you can look at the data and, you know, you can tell, you can see that smaller funds tend to outperform, newer managers tend to outperform. But for those large institutional investors to write a, you know, a five or even a $10 million check into a $30 million fund just doesn't want, it doesn't move the needle for them. And so, and two, they don't, you know, they've got to write $50 to $100 million checks.

So they're just fishing in completely different ponds. And so the challenge that that leaves then, for kind of newer emerging managers is if you strip out institutional pools of capital, that sort of leaves individuals and family offices. And so then on the LP side, on the family office side, the other thing we saw was that, and having sat in the seat at a family office, right. Is there's an explosion in the amount of new emerging managers every year. Like, it's just going up into the.

Right. And so the folks that we are, that we want to partner with, right. Are family offices that are, that don't necessarily have a venture team or a venture person, right. Typically they have maybe a CIO. So maybe it's just the family, or maybe they have a CIO.

But that CIO covers multi asset classes. So they do the stocks and bonds and real estate and credit and everything else, and venture and private equity. And so what we saw was folks like that in the last cycle tried to, they're interested in venture, they want exposure to the asset class, and so they tried to go direct by doing direct venture deals. And I think what they saw is there's, there's adverse selection and trying to do that, right. They're not seeing the best deals.

And so if they want to do it through a kind of fund of funds or a manager strategy, right. They're also getting 20, 30, 40 pitch decks a year from emerging managers. And they all kind of look the same to them. It's like they all got great experience, they all have downstream co investors with logos that everyone recognizes. And so it's kind of like, well, how do I choose here?

And obviously the dispersion in kind of top quartile versus bottom quartile managers in the space is massive compared to relative to other asset classes. And so I guess that's sort of the gap that we saw is on one side managers can't access the bigger institutional funds, and on the other side you've got lP's that want exposure but don't know how to select managers. What's a typical fund of funds? Fee structure for our allocators who are like, oh, maybe I should be doing this instead.

So typical fee structure for a fund of funds, and we don't. So we think of ourselves as slightly different. We're a hybrid fund, but so I guess for typical fund of funds, anywhere from, call it 1% management fee annually and anywhere from five to 10% carried interest. And maybe you can step up more than that if there's performance hurdles or whatever, but that's sort of the kind of the standard fees for funded funds. And so we spent, obviously Ankit and I came from the family office world and spoke to lots of different family office investors, and for a lot of them, that's sort of a non starter.

They just can't stomach paying basically three and 30 for an investment. And by the way, that's totally fair. And so that was actually the first thing when Ankit and I sat down to do this, that was the first thing we whiteboarded was how do we set up a fee structure for our fund and our vehicle? And can we make a product that is kind of tailor made to people who believe in the benefits of a fund to fund, right. The diversification of having 15 underlying managers and three 4500 underlying portfolio companies, but not wanting or kind of being anemic to paying the added layer of fees.

And so when we thought that through, that sort of dictated our portfolio construction, portfolio weightings in terms of, so the way that we structured our fund is a third of our investments will be lp commitments into emerging managers, we'll do about 15 to 20 of those, and then the other two thirds will be direct investments into breakout companies out of those firms. And so the way we set up our fee structure was such that on the third of the portfolio where we're investing in funds, you're going to pay double layers of fees. But then on the other two thirds, you're actually going to get a fee break relative to other investors in the market. So that on a fully loaded blended basis, our investors pay roughly two and 20, or close to it. Josh, from the original conception of the idea of the fund to now, were there any kind of shifts in strategies or just learnings as you went out to market on your own?

Good question.

I wouldn't say the strategy has shifted. It's only been a year. And so I think if the strategy shifted, probably, we probably didn't have too much conviction in it, but I would say that, and in some ways, I think that the market has kind of validated a lot of things that we sort of thought when we set out to do this a year ago. But I would say that there's kind of nuances in the strategy that we stress test all the time. I'll give you an example.

Right now, we think that there's kind of better risk adjusted returns to be had in the pre seed market relative to the seed market. Right. If you believe the data, which in our business is. I'm sure you guys know it's hard, right? Like, I think that's the worst part about this job, is that the data is opaque, it's self reported, there's a lag to it.

And so even as you're looking at it, you look at it all the time. It's hard to trust. Right. But right now, it looks like almost every stage pre seed series, a growth, pre IPO valuations have come in pretty dramatically over the last 24 months. Seed is the only category that really hasn't happened yet.

And so that's kind of influenced the first couple of investments we made for sure. How does this co investment strategy play out in real time? What's it actually look like? So basically what we want to do is we want to invest in managers. We want to be kind of a hands on partner to them.

We want to track the underlying portfolio as they're investing and as they're building it. And this is kind of something Keith and I do all the time, is go through the portfolio. We'll do our desktop diligence on companies that the managers have invested, either out of the fund that we have committed to, or out of prior funds. And we'll get on the phone and say, here's the three or four things that really interested in, and if it's something where the founder can make or the manager can make an introduction to the founder, we'll start those conversations as soon as possible. And the idea is we want to get kind of ahead of a financing round.

So our co investment strategy is to come in once the managers that we invest in exhaust their follow on reserves. So typically that happens kind of around, somewhere around series B. There's sort of other metrics we want to see on our side to make it an interesting investment for our strategy, but we want to get kind of call it six months ahead of that series B term sheet getting dropped. And so this is, I mean, again, this is kind of one of the kind of core tenets of the thesis, which is something we saw again and again when we were investing at the family office, which was, we were investing in these smaller funds, 2030, $40 million funds. And what would happen is those folks would make a pre seed or seed investment in a company, they'd get 810, 910 percent ownership.

They'd follow on one or two rounds, and then what would happen is company would start to break out, would be doing really well. They'd get a term sheet from a tier one, and that manager would get an allocation into the round, and those would be kind of chunky allocations, would be, it could be three, four, $5 million allocations. And so the manager would, they'd spin up an SPV, they would get on the, they'd send out a blast email to their lp's and say, and by the way, these are all folks who, when they made the LP commitment, really said that, raised their hand and said, we really want to see co investment opportunities. And then what inevitably would happen is half of them were busy and it's to no fault of those family offices. The problem is, and this is kind of what we're trying to solve, is like, they're not set up to make a decision on a direct venture investment in ten days, right, which is.

Or less. Which is kind of what you have to do when those deals come together because they move quickly, you guys know. And so, and so, yeah, we just saw that again and again and again. And the manager would spend ten days or two weeks away from their day job trying to fill this SPV and walk away with a half a million dollars in the SPV, right. And then they look kind of foolish to the founder, and it was just kind of a bad experience for everyone.

Ernest Sweat
Can you take the, can you take the guesswork out of that? Like that, that when, when you're the GP saying, I think I may be able to go get you three, four, and then you go out to your network and you only come back with 500k or whatever it is. Can you take the guesswork out of that for your gps that you're like, I mean, how does, how do you actually make that easier for your gps? So what we want to do is say, is say, you know, meet that founder again ahead of time so that we can build conviction and kind of get to a place where we can tell the manager, look like we love it. We love the business.

SPV never has to happen. The SPV can happen, but we can be kind of, we can sort of anchor that SPV. Got it. We're okay. Go investing on the direct side through an SPV.

Josh Porter
Yeah. And paying fees like we want to. You know, we would hope if we are, you know, a majority, that SPV will, will pay below market fees. But I think the idea is that it enables and gives the manager confidence that they can go out to their LP's and say, hey, this deal is coming together. First look is already in for a million or a million five.

If you guys are interested, speak to us, speak to them, whatever. And so we hope that, I mean, look, even if they don't, even if they can't wrangle other LP's into that vehicle, it's. They're still hopefully in a better place than they might have otherwise been. Yeah, for sure. No, first look, the LP that says they want to co invest and actually.

Does, that's the idea. And so that we get a first look at those deals. I love that branding. Now we're going to take a quick break to speak with our sponsor on the show. Today, we have an industry expert and sponsor, Nick Talbreja, co founder and CEO at Sidecar IO.

Alexa Benz
Sycar helps you start and run your fund, or SPV, so you can focus on making deals, not spreadsheets. So, Nick, it's a pleasure having you here today and partnering with us at swimming with allocators. But first, I would love to hear what's the origin story behind Sidecar? Thanks for having me here, Ernest. It's been an honor working with you and a privilege to be here.

Nick Talbreja
Origin story behind Sidecar was really solving for a problem that I faced and many ways. I was you before sidecar. Prior to that, I was a lawyer. I practiced law for about a decade in New York City and in the Bay area, worked at larger firms, taking companies public in New York. And then I moved to the Bay Area where I worked with startup companies and venture capital firms and really got enamored with this whole notion of creating something from nothing and trying to solve problems for the whole world with a lot of energy and passion.

That took me down a path of eventually starting my own law firm. After working for larger law firms. And when I had my own law firm, I'd work with companies from the zero to one stage. Frequently, people would come to me with just an idea. They needed an entity, they needed a business to actually take that idea to a commercial mission.

And I would help them with that process, help them grow their team, help them with fundraising, help them with whatever commercial transactions they had, so on and so forth. I would see this growth and think, well, I'm not really playing a part in that. I'm just serving as their advisor and counselor. I'm charging an hourly fee. I want some upset.

I want to be a part of this journey. So I started investing behind these companies that were my clients. And that's, that's really the origin story of sidecars. When I started investing behind these, these, these companies, I used spvs, and I did look at the market at the time because I didn't want to do everything myself. I could, of course, put together legal forms and open bank accounts and whatnot, but I didn't want to handle the tax returns and the accounting side of the business.

So, all right, who's out there doing what I need? Who's creating software for myself, an emerging vc? And I found that short of a marketplace type of environment, there really was no software. So really sidecar was born out of a personal need of creating software for my own business, of just investing behind my clients, which then became investing in other businesses, which then became supporting other investors and running their businesses, of investing behind companies. So it was a very organic type of, type of growth here.

And of course, over the last three years, it's been really fun growing to hundreds of customers and moving over $800 million through the software that we built. But it really started again out of just the personal need for something more. Who uses side car other than me? And why other than you and me? Yeah.

Various emerging venture capitalists use Sidecar. So anyone that's trying to perhaps launch a fund and wants to build a track record to prove that they know how to find great opportunities and back world changing founders, they use Sidecar to build their track record. If you have a fund, you know, the benefit of being an LP in a fund, oftentimes is the ability to co invest alongside the fund behind the funds winners. Those funds use us to create spvs alongside the fund. Many first time fund managers use us for their first fund.

Given that we now have a fund product called fund plus. So really, anyone in the venture ecosystem is, is a prospect for us. And as a customer, one thing I've been impressed with, and I have to admit I was a little naive on when first, kind of like even deciding which platform I would use for my spvs, was your delivery of k one s. Could you share with us why this has been kind of a focus area that historically has been ignored? As one example, I have been, I've invested in very legit, established, grown up funds and have waited six, nine months for k one s before.

Yeah, you know, late k one s is something that folks are not happy with. And, you know, in our world, fund administration businesses have largely been very manual in how they operate. Right. So if you think about fund administrator, I don't think the image that comes to mind is software. I think it is fund accountants using Microsoft Excel, consuming legal forms, interpreting them, putting it in some accounting platform, generating financial statements, taking those financial statements, working with a tax advisor, generate tax forms and distribute k one s.

That's the world that existed prior to sidecar and still largely exists when you think of a fund administration. But in our world, we didn't want any late k one s, at least k one s we could control the delivery of. There are certain k ones that will undoubtedly be late still because you can't issue them until you receive information to process. However, for the vast majority of private investments in venture capital, there shouldn't be any late k ones because it's a pretty simple, straightforward process to generate them. However, that world can only exist with software of actually getting everything done in a timely and organized fashion.

We basically have to build software that was bespoke and opinionated around the types of structures we create, how you get into these investments, how we track capital flow, how we write to basically proprietary ledger, and then build our own accounting and tax systems around those information centers to generate k one s and issue them to your investors. Nick, you're clearly out ahead of the future of venture capital. For those interested in using sidecars software, please visit Sidecar IO allocators. And now back to our allocator interview. Josh to kind of not push back on the, on the, on the model.

Alexa Benz
But there has been a rise of hybrid models, different levels of success. Yep. Why do you think it's so complex and hard? And what are you all trying to do differently from the kind of like back of the, you know, in the back, you can assume, oh, they're only pushing the things that are. Yeah.

Josh Porter
So, so there. There's definitely, there's definitely, you know, a handful of firms and funds that kind of look like what, what we do. I would say. I would say one thing that. That I think makes us unique is we.

For us, it's our investors are investing in one vehicle, and so our LP commitments are coming out of the same vehicle as our direct investments. Right. And so one of the sort of, to answer your question about one of the reasons why it makes it kind of hard is, like, our fee structure looks a little wonky. And so, you know, when we, and this is something we talk about internally all the time, is like, how do we position ourselves? Like, I was calling it a hybrid fund a thing.

Do people understand that? And when they see the fee structure, just. People are just accustomed to seeing two and 22 and 20, or like, one in ten. And so when they see ours, it looks a little different. And there's a bit of an education process that goes into kind of explaining why we set it up this way.

But the reality is that we wanted to make sure that, that on the fund investing side, we had a mechanism in there that kept us honest. If you believe, like we do, that there is alpha in smaller emerging funds, then those investments can and should be treated like direct investments. If you can get a five x or an eight x on a fund, you'd be happy to get that On a direct investment. And so what we didn't want to do is create a fund to funds vehicle that had one fee structure and a direct investment vehicle that had another fee structure, and that they were sort of sister or arm's length relationship funds, because we felt that you could imagine a world where that would lead you to make some investments on the fund side, that could be purely for deal sourcing. Right.

And so if we just said, like, look, if we think that, if we think we're only gonna make 15 of these investments, these fund investments out of this fund, we have to believe that every one of these investments can be a 3456 x fund. And if we do that, we feel pretty good that we're gonna see a handful of opportunities out of that, out of that manager that we can then co invest in later. And so if you pull it all together, we think it can be a. A pretty unique product. Are you on the hunt for managers right now?

Always. Yeah. No, yeah, we are. How do you usually source them so sourcing? How do we like to source just cold LinkedIn?

Just email me. No. With lots of emojis. No, sourcing comes from. I mean, you guys know, it's like when you're, if you've been in the business for a while, you've got, you've got a pretty healthy network of people.

And so you start to reach out to them and tell them what you're doing. And word gets around, especially in a market like this, where there's a supply and demand kind of imbalance of capital. It's like the word gets out pretty quickly of who's actively deploying. And so, yeah, obviously, like, obviously you always want to get, you always want to get deal flow from trusted sources. And so we talk to founders, we talk to other gps, we talk to, you know, we've got a, I've got a list in front of me of, you know, about 45 family offices and institutional lP's that we know are at least looking at emerging managers.

And so, you know, we're, we're on the phone with them all the time trading notes on managers. And, hey, have you seen this one? No, have you seen this one? But, and I know it joked about the cold inbound, but, like, I actually don't, I know some people are like, that's not the best way to reach someone. And, like, I don't, like, I think it's fine.

I think that, like, I'll respond to a LinkedIn note or a cold email if it's a compelling enough, you know, opportunity. You know, I usually, I think that there's usually probably a better way to get to someone. If you just take like, ten minutes and do a little work, you can probably find someone that will introduce you. But. Yeah.

Ernest Sweat
And what are you looking for? What are you filtering for? Great question. So we are looking for, you know, at the end of the day, we're looking for either sector experts, for managers. So basically, we've got to believe that a manager has a unique edge in terms of sourcing and then in terms of evaluating and winning deals.

Josh Porter
And so that edge can come from either you were a founder or an operator in, in a sector, right? And that kind of gives you the right to win deals in that sector. Or it could be you've got a geographic edge, you're the go to pre seed fund in Austin or Denver.

And so first and foremost, we're looking for, well, yes, we're looking for an edge on sourcing. We're looking for an edge on kind of winning deals. And then beyond that, right where we want to see, we want to see a track record of that you are investing into the fund that you're raising. Now you have a track record of doing something like that. A lot of times you see people that will, a manager will have an angel portfolio and, but the problem is the angel portfolio is like, they invested it, 500 posts in this thing and they invested in this category that they're not doing.

So we want to see, is there consistency with what you've been doing and what you say you're going to do?

And then beyond that, we want to see that you at least understand the responsibility of being a fiduciary, because that's something that is not, you know, it's different than angel investing or maybe investing for a family office. You know, you've gotta, there's just, there's a lot more, there's a lot more rigor that goes into kind of managing a fund for other people's money. Yeah. It always comes up. It's a hard transition from an investor to a fund manager.

Alexa Benz
Totally. And so I think a lot of people kind of don't understand that.

Are there any strategies that you haven't seen much of that you think would be successful? I mean, we've seen a lot. So we started looking, we kind of really started looking at deals in, call it summer of last year, and we've looked at 250 managers in our strike zone. And so we've seen quite a few. You know, we've seen a lot of strategies.

Josh Porter
One, you know, there's a couple that stand out because of, I would say, how unique they are that I think are just sort of interesting and worth mentioning. There's a, there's a fund in New York, and I won't, I won't give names, but there's a fund in New York that they are investing. They've got a whole thesis around investing in immigrant founders that are, repeat founders who had a prior exit between ten and $200 million of enterprise value and are building their second company in the exact same category. Category. And I was like, that is pretty, I mean, that is pretty niche.

But you can see why that would, you can see why that would 100%. Yeah. Potentially be an outlier fund. And. It had to have happened between 2011 and 2019.

Alexa Benz
No. So basically it was like he put a top on, like the exit value, because it's like if the founder made too much, they're probably not as hungry as he wants them to be. If they made too little, they might be taking too much risk. I thought that was cool. And then there's another one.

Josh Porter
There's an accelerator, Ernest, in your neck of the woods that we've spent some time with. And they, I guess, sort of similar, but like they're looking for repeat founders where they are kind of early to mid thirties, that, where they've got a spouse or a partner. No kids yet, but want to have a family and want to take one more swing before they have a family. And, you know, again, I thought it's just, it's a, it's a unique strategy. I would love to see that deck.

Alexa Benz
I'm just like, I'll ask them if. I can share it. That is, that is some strategy. There was one, there was. It's funny.

Josh Porter
We were talking to, this is, we haven't seen this, but I actually thought this was kind of clever. We were talking to a founder here in LA who very successful, took a, you know, founded a company that he took public and he has since moved on to academia. And we were chatting with him and he said, you know, there's all of these, there's all of these funds out there that are kind of alumni funds for colleges. So there's like GPS out there that will invest in Stanford alumni or Princeton alumni. And he's like, I actually think that the, the affinity networks are stronger and the relationships are stronger for private high schools.

And I thought about it. Right. And so he's like, what? You know, could you build a fund around? I'm just spitballing, like Phillips Andover alumni or whatever.

I thought that was interesting. So someone go build it. Yeah, for sure. I think Sam Altman just spoke at my husband's 100th high school reunion fundraiser. And I don't know, he wouldn't do the same for his college, frankly.

Ernest Sweat
He was at Burroughs, which anybody from St. Louis asks, the first question they ask is, where'd you go to high school? Right? Yeah. And so I think for those particularly sort of exclusive, well heeled high schools.

That's an interesting thesis. It was a really impressive 100th high school reunion. I bet.

Alexa Benz
I have nothing to contribute to this conversation, by the way, I'm. A product of public school. Me too. Me too. Although went to a college with a lot of those schools and learned about them.

Nick Talbreja
Same. So is it a good time to be allocating, to venture, you think, versus other asset classes? I mean, yes. Otherwise we would not be. I would hope so.

Josh Porter
Otherwise we wouldn't be doing this. But I mean, look, like there's certainly dynamics in the market right now that would lead one to believe that 2024 or 2025 will be pretty interesting vintages. Just in terms of, like we mentioned earlier, supply and demand, imbalance of capital. Right. There's more higher quality founders chasing less capital.

Right. And so that means that prices have come down and the ability to kind of access higher quality companies for investors has gone up. But, you know, just like in public markets, right. It's, it's really, it's impossible to try to time the market. So I think, like, if you're going to invest, it sounds self serving, but if you're going to invest in venture, you've got to do it and commit to it and it's got to be part of your strategy.

You can't, you can't kind of dip in and out of it. There was a, I think it was stepstone or industry ventures. I think it was stepstone. Did this release, this research paper, this white paper in Q four, and it was super interesting. Basically, they looked at funds between, I think, 1970 and 2022.

So pretty, you know, pretty deep data set, and they found that 95% of returns came from, and it's tracked like 2000 funds, 95% of returns came from six vintages. And so, and they weren't right. And you, and they weren't necessarily the vintages you would have thought like necessarily after a correction or whatever, which kind of speaks to the power law nature of the business. And so it's like if you're, you can't say like, I'm going to do this fund, but then not the next one, and I'm going to get back in when I think the market just doesn't work that way. And any final points that you think would be relevant to this audience, things that you find yourself debating with your partner?

I mean, there's lots, but I think, like, I think, you know, I think one of the, one of the hardest, worst parts of this business for any investor is you meet, you know, you meet so many great, talented people that, you know, are gonna, you know, they've got it and they're probably gonna be wildly successful. And unfortunately, you only have so much capital and so you have to make really hard decisions. And so, you know, sometimes you've got, it's just the nature of the business. You've got to pass on people that, you know, you've built a relationship with and, you know, over time, over the diligence process. And so, you know, that's something we think about is like, how do, how do you pass in kind of the most respectful manner and what can you do to offer advice or anything and how can you be authentic about why you said no?

That's something we kind of think about a lot. Yeah. All those people are worth your time. I feel the same meeting with founders that you're gonna cross paths again. Totally.

Ernest Sweat
When you need something from them, etcetera. Totally. No ghosting, allocators. No ghosting. No ghosts.

See you later, ghosty allocator. Josh has been a pleasure. Thank you for your insights. It's a lot of fun. Appreciate it.

Alexa Benz
Glad to have you on. Yeah, appreciate it, guys. See you later. Allocator after portfolio tile investing with a smile.

Josh Porter
Allocator after portfolio tile investing with a smile.

Ernest Sweat
Allocator after portfolio tile investing with a smile.

Alexa Benz
Allocator after portfolio tile investing with a smile.